Thursday, April 16, 2009

American Airlines Antitrust

I'm writing a term paper right now about an antitrust case the US Department of Justice (DOJ) filed against American Airlines (AA) on May 13, 1999. They accused AA of predating low cost carriers (LCCs) out of their Dallas Fort Worth (DFW) hub. AA was found not guilty on April 27, 2001. My research question is: did American Airlines price their tickets differently after the DOJ filed suit on May 13, 1999? I wanted to know if they responded to the case being filed, not necessarily the outcome.

Using panel data from the first quarter of 1991 through the third quarter of 2005 with 72,535 observations on 1,935 routes. Controlling for a bunch of stuff, including heteroskedasticity, serial correlation, and clustering of standard errors, I found that there was a price hike of around $30 on the routes involved in the case and an $18 hike in non-case routes after the suit was filed. Higher prices would mean that predation is less likely. So, I conclude that AA was responding to the idea that they were being tried for antitrust. I think it would be much more efficient to get the DOJ to send letters to companies telling them that the DOJ is ready & willing to prosecute if the company doesn't change its bad behavior. As long as the company believes that the DOJ will prosecute, then it should be in everyone's best interest to stop the bad behavior and stay out of court.